Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

I know that the subject of flood insurance has little "glitz" and that the narrow focus here is on co-lender deals (my other postings on this topic), but if -

• you're in a multi-lender loan (participation, syndication, etc.)
• with federally regulated lending institutions
• where any portion of the real estate collateral is in (or even near) a flood plain

. . . then this announcement by the Loan Sale Trading Ass'n (LSTA) should interest you.

Recently, the LSTA has published the final version of the “Market Standards for Flood Insurance Processes in Syndicated Lending”. 

The federal laws and regulations regarding flood insurance come into play when any of the co-lenders is a federally regulated institution.  Briefly, the regulations mandate that lenders obtain certain flood documents and impose a requirement and a time frame for force placement.

The LSTA guidelines establish procedures for the administrative agent (or lead lender) covering the following topics:

• obtaining documents which evidence compliance with such laws and regulations
• adequate monitoring by lenders in the syndicate of such compliance.

So, if your distressed loan is in (or even near) a flood plain, and if you're a federally regulated lender (or if any other lender in the co-lender group is federally regulated; or if you might be selling the paper or the collateral after the co-lender group takes ownership), then these standards are important to you.

Note also: to what extent will these standards "influence" the broader servicing community and standard of care?

You can bet that these standards will be used "against" the lead or agent bank by other co-lenders in the deal.  Ignoring these standards could be a breach of the servicing obligations or standard of care.

If you have an example of this, or a similar situation, please comment below.

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It has been a long, long time since claims of lender liability received any real attention.  Indeed, Mike Baggett co-authored a book in the early '90s on lender liability.  Mike's book was somewhat of a best seller among the tough time for lender crowd (which is tough for me to admit, since I went to Texas and Mike went to Texas A&M —and as an former "yell leader" at TAMU, Mike is an "Aggie's Aggie").

Since then, however, the topic has fallen off everyone's radar screen.  The fall off has been this dramatic: the publisher of Baggett's book has NOT updated it since the initial publication, and it is out of circulation.  But to give you a sense of how we see lender liability creeping back into play, below is a short list of where we're dealing with it now.

If nothing else, it will equip you to watch for similar situations—and perhaps get ready.  As always, if you have an example or a question or comment, please post it.

• Defending National Banking Association in a currently certified class action in the Eastern District of Texas challenging the bank's status as trustee for approximately 220 trusts.  The bank is the latest successor trustee in a series of successor trustees and fiduciary substitutions and appointments dating back to the late 1980s. The class alleges defects in the trusteeship chain of title which purportedly disqualify the defendant bank from serving as trustee. The class seeks to recover all trustee fees paid to the bank and its predecessors, together with appointment of new trustees. Class certification is on appeal to the Fifth Circuit.
   
• Currently defending REMIC Trust Lender in state court action alleging Special Servicer induced borrower into making property renovations by misrepresenting its intent to extend loan maturity and interfered in borrower's efforts to secure refinancing.
   
• Secured judgment for Hedge Fund that acted as lender to high-end residential subdivision developer.  Developer contended lender breached promise to lend additional sums to complete subdivision and negligently advised borrower in connection with the development.
   
• Represented lender against allegations by commercial developer/office building owner that lender had failed to fund multimillion dollar construction loan.
   
• Representing bank where borrower and guarantor allege failure to fund and credits on guarantee liability in connection with California residential development.
   
• Represented lender against claims that it and its president had aided and abetted borrower's securities fraud, including borrower's theft of millions of dollars belonging to securities customers.
   
• Defended lender against counterclaim that it had improperly ceased funding loan.  Lender had sued borrower and guarantor for misappropriating collateral in asset based funding arrangement.
   
• Defense of National Banking Association in state court against lender liability lawsuits alleging claims for improper loan servicing and wrongful foreclosure. 
   
• Defended national residential mortgage lender in state court against lender liability actions for wrongful foreclosure.
   
• Successful jury verdict for National Savings and Loan Association to collect debt owed by borrower on SBA loan.  Borrower counterclaimed that bank had misled it about the profitability of the business to induce the loan. 
   
• Defended Lender against borrower's claim that bank had refused to refinance or modify construction loan and wrongful foreclosure on partially developed subdivision, including private water utility.
   
• Defending national bank in Arizona against allegations that one of its workout officers conspired with one of the borrower's officers and other borrower-insiders to steal the borrower (a closely held corporation) from its owners through a negotiated private sale of the borrower's assets. The borrower held inventory, equipment and AR securing the $33M debt.

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This is the second of a two-part series (PART ONE) covering initial due diligence topics for workouts involving co-lender structures, with a focus solely on the participated or syndicated co-lender structure. The series is not a comprehensive listing of possible issues on this topic, but merely a basis template to assist you as you review the co-lender and other relevant loan documents.

Typical Servicing issues:

• how are on all decisions made within the co-lender group on these subjects?
  • waivers and consents
  • default\enforcement (special servicing issues)
  • after enforcement (expenses to protect\preserve, to sell, to complete; title of the property [name of servicer; tenant in common; nominee entity jointly owned]
  • advances, expenses and losses
  • excess recovery
  • is there a buy\sell provision if co-lenders are not able to resolve disagreement?
• what decisions may servicer make without input from co-lenders
• duties of servicer: what must it do (reporting, inspections, etc.)?
• standard of care of servicer
• what if servicer has an equity position?
• rights of co-lenders to examine and copy
• notification rights (when must servicer notify a co-lender)
• fees (primary servicing; special servicing; asset management and disposition)
• future property inspections and reporting (review reports only; or more active role, such as accompany servicer during on-site inspections)

Does the loan seller or originator have any liability?

• contractual duties and warranties
• fiduciary duties

Transfers

• buy\sell for disagreements
• transfers to affiliates
• transfers to third parties (right of first offer?)
• is sub participations\syndication prohibited?

Sharing of payments: on sums paid by the borrower, are payments applied -

• proportionately to all co-lender?
• non-proportionately to co-lenders?

If you have any comments, suggestions or additions to the foregoing, please post a comment.

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